Finisar, Applied Opto Join Davidson's Fiber-Optic Pantheon
D.A. Davidson's Mark Kelleher late yesterday initiated coverage of three more fiber-optic component names, Applied Optoelectronics (AAOI), Finisar (FNSR), and NeoPhotonics (NPTN), starting the former two at a Buy and the last one at Neutral.
Amon Finisar's charms, it is in the pole position to provide laser diodes for so-called 3-D sensing for Apple's (AAPL) iPhone and for other smartphones:
Finisar's long history as a leading supplier of lasers puts it in a strong position to address the market for 3D sensing applications. Autonomous vehicles and consumer electronics are two obvious 3D sensing markets that will require sophisticated arrays of lasers to function. We believe FNSR is in advanced discussions with a number of possible consumer customers, and that 3D sensing could drive significant revenue over the next several years.
Finisar also has been a big beneficiary of spending in China, with "a significant portion of the 100 GigE market in China as it transitioned from CFP to CFP2," but it has suffered along with the other fiber-optic names as China slowed spending this year.
"We expect this headwind to continue through 2017," writes Kelleher, "but it should turn into a tailwind in 2018 as demand in China returns."
Applied Opto is a dominant force in cloud computing data centers, notes Kelleher, and is "well positioned to benefit from the growing dominance of'hyperscale' data centers from customers such as Amazon (AMZN) and Microsoft (MSFT):
AAOI grew revenue 37% in fiscal 2016, and 91% in Q1. This strong result was driven by the sale of 40G and 100G optical transceivers to the'hyperscale' cloud providers, particularly Amazon and Microsoft. We believe AAOI is well positioned for continued growth as these customers and other cloud providers continue to scale up massive datacenters. Larger datacenters are driving a transition from PSM transceivers to higher-margin CWDM transceivers, which will also benefit AAOI.
Applied also has a vibrant market selling to cable operators:
The company's remarkable success in the hyperscale data center market has overshadowed similar strong growth in the CATV optical market. In the most recent (March) quarter, the company delivered 69% growth in the CATV vertical, which now accounts for 14% of total revenue. We believe CATV providers will continue to drive optical architectures into their networking deployments, providing additional bandwidth for demanding consumers, and that AAOI will benefit from that infrastructure spend.
As for NeoPhotonics, Kelleher likes the company's focus on sales of lasers for higher-speed optics, from 100-gigabit per second to 400-gig and beyond.
But, "while there are numerous growth opportunities for the company, we believe much of this opportunity has already been priced into the stock."